On Monday (January 28, 2013), Microsoft and wholly-owned Google subsidiary Motorola Mobility will square off in federal court in Seattle to discuss the implications of a grant-back clause in a license agreement Google signed with patent pool firm MPEG LA for the rate-setting part of the FRAND contract case in the Western District of Washington. Yesterday (Wednesday, January 23, 2013) was the deadline for the parties' briefing and submissions of extrinsic evidence that might assist the court in the interpretation of the relevant contract.
Microsoft argues that, as a contributor to the MPEG LA pool, it is entitled to a reciprocal license to Google's H.264 declared-essential patents at the equivalent of the pool rate, and that the MPEG LA-Google contract (which is the same contract numerous other licensees signed with MPEG LA) also relates to patents held by companies acquired by Google subsequently to the conclusion of that agreement, such as Motorola Mobility in this particular case. Microsoft also took this position in the ITC investigation of Motorola's Xbox complaint, but its related motion has meanwhile been denied as moot (i.e., a non-issue) because the Google subsidiary withdrew its H.264-related claims earlier this month. Unlike a federal court, the ITC can't determine royalties or award damages; it can only ban the importation of infringing products into the U.S. market.
Originally Motorola demanded an annual royalty amounting to $4 billion in a conservative estimate. Very recently it was talking about a possible annual cap in the $100-125 million range (Microsoft accused Google/Motorola of "rug bazaar" negotiation tactics). If Microsoft's legal theory relating to the MPEG LA agreement succeeds, we're ultimately going to be looking at hundreds of thousands of dollars.
Google (Motorola) tries to prevent this by taking the position that Google's H.264 license has a different "scope" than the grant-back license demanded by Microsoft, and that, in any case, the license agreement "extends only to Affiliates identified to MPEG LA by Google in writing".
In my opinion, the language of any license agreement always has room for improvement, but I think this one is clear enough that someone who signed it knew he was going to have a grant-back obligation even with respect to companies that become subsidiaries after the conclusion of the agreement, which the contract in fact states expressis verbis. But Judge Robart wanted to look at this from all angles and asked the parties for briefing on extrinsic evidence. Google argues that this is unnecessary and that the agreement must be interpreted in the light most favorable to the party that didn't draft it, arguing that this is a non-negotiable "take it or leave it" agreement. I don't know about MPEG LA's flexibility in negotiations, but even if MPEG LA itself never negotiated the terms, there still wouldn't be a Hobson's Choice situation: MPEG LA does not have exclusive rights to the patents in the pool, and Google could always have chosen to freely negotiate direct license agreements with any of the contributors rather than go through MPEG LA as an optional one-stop shop.
Last week it became clear what kind of extrinsic evidence Google was particularly concerned about: an affidavit by an MPEG LA official. Judge Robart denied Google's belated request to take a deposition, given that MPEG LA was the most obvious organization to testify in this context.
While the declaration attached to Google's brief was signed by one of its outside counsel, Microsoft provided a declaration of Lawrence (Larry) Horn, the president and CEO of MPEG LA. I'm sure that if Google had been able to find support for its theory from anyone in the industry, it would also have relied on a declaration by an external witness, but the theory flies in the face of everything professionals in this industry know about standard-essential patent licensing.
Larry Horn's declaration strongly supports Microsoft. I have uploaded it to Docstock. Here's the PDF version, and below that one you can find the full text of the declaration because I thought this would be useful reference material for anyone researching this matter (and I think that affidavit speaks for itself):
01/23/2013 declaration of Lawrence A. Horn, President & CEO of MPEG LADECLARATION OF LAWRENCE A. HORN
I, Lawrence A. Horn, declare as follows:
1. I am the President and CEO of MPEG LA, LLC. Before assuming my current role, I was in charge of Licensing and Business Development from approximately July 1997 to March 2006. MPEG LA is a world-leading packager of patent pools for standards and other technology platforms used in the consumer electronics industry.
2. Among other technologies, MPEG LA administers patent pools associated with certain video compression standards, including the MPEG-2, MPEG-4 Visual, AVC/H.264, and VC-1 standards.
3. I understand that the above-captioned matter [Case No. C10-1823-JLR, W.D. of Wash.] involves a dispute regarding various patents claimed by Motorola Mobility LLC and/or [Google/Motorola subsidiary] General Instrument Corporation to be essential to the AVC/H.264 video compression standard. The term "AVC" (or "Advanced Video Coding") and "H.264," being materially synonymous, are used interchangeably here.
4. From approximately Fall 2002 to Summer 2004, I was actively involved in the formation of MPEG LA's AVC/H.264 patent pool. On behalf of MPEG LA, I facilitated a series of meetings among potential licensors that led to the formation of the AVC/H.264 patent pool, including development of standard terms on which licensors joining the pool agreed to license their standard essential patents (SEPs) (following a determination that such patents are in fact essential). Since formation of the pool in 2004, MPEG LA has administered it.
There are currently 30 Licensors in the MPEG LA AVC/H.264 pool, who collectively have contributed hundreds of SEPs. Microsoft is one. There are currently more than 1,500 Licensees to the pool, including Microsoft and Google, Inc.
6. I understand that a true and correct copy of the January 24, 2005 AVC Patent Portfolio License Agreement between MPEG LA and Google, attached hereto as Exhibit 1 (the "Google License"), has previously been filed as part of the public record in the above-captioned matter. The Google License is a representative example of MPEG LA's standard AVC Patent Portfolio License Agreement (the "AVC/H.264 License"), which has been available to interested licensees since approximately July 2004, subject to updates, expansions and renewals.
7. MPEG LA's standard AVC/H.264 License includes the following "grant-back" provision:
8.3 Licensee Grant. Upon full execution of this Agreement, Licensee agrees to grant a worldwide, nonexclusive license and/or sublicense (commensurate to the scope of the licenses which Licensee has selected hereunder) under any and all AVC Essential Patent(s) that Licensee and its Affiliates, if any, have the right to licensor and/or sublicense, to any Licensor or any sublicensee of the Licensing Administrator desiring such a license and/or sublicense on fair and reasonable terms and conditions. For purposes of this Section 8.3 only, the Licensors' per patent share of royalties which are payable pursuant to Article 3 of this Agreement shall be presumed to be a fair and reasonable royalty rate for the aforementioned license and/or sublicense to be granted by the Licensee.
Exhibit 1 (underlining and italics added).
8. Section 8.3 of the AVC/H.264 License is identical to Section 8.3 of a prior license agreement for an earlier video compression standard -- MPEG LA's original MPEG-4 Visual Patent Portfolio License (the "MPEG-4 License") -- except that the phrase "and its Affiliates, if any" (underlined and italicized above) was added for the AVC/H.264 License. I understand that a true and correct copy of the original MPEG-4 License (without attachments) executed by General Instrument in September 2002 (attached hereto as Exhibit 2), was produced by Defendants in the above-captioned matter.
9. "Affiliate" is defined in the AVC/H.264 License to include any Legal Entity controlled by the Licensee, including those entities owned "more than 50%" by the Licensee:
1.1 Affiliate - Shall mean a Legal Entity which now or hereinafter, directly or indirectly, controls, is controlled by or is under common control with Licensee. The term "control" as used in this Section 1.1 shall mean (a) ownership of more than 50% of the outstanding shares representing the right to vote for directors or other managing officers of Licensee or such Legal Entity; or (b) a relationship similar to that described in Subsection 1.1(a) deemed by the Licensing Administrator in its sole discretion to represent "control." An entity shall be deemed an Affiliate only so long as such "control" exists.Exhibit 1.
10. The words "now or hereinafter" in Section 1.1 of the AVC/H.264 License ensure that entities over which the Licensee acquires control after execution of the license agreement are also treated as Affiliates.
11. The final terms of the AVC/H.264 License were developed through a process of negotiation among the initial group of H.264 essential patent holders responsible for forming the H.264 patent pool, many of whom are now also Licensees.
12. The phrase "and its Affiliates, if any" was added to Section 8.3 as a result of discussions that I initiated. These discussions consisted primarily of emails among me and the participants in the pool formation discussions (members of the "AVCGroup" identified in the emails). Attached as Exhibits 3 and 4 are true and correct copies of email exchanges from March and April 2004, concerning the proposed addition of the "and its Affiliates, if any" language to the grant-back provision that I understand were produced by Microsoft in the above-captioned matter. Paul Bawel represented General Instrument/Motorola at the MPEG LA AVC/H.264 pool formation meetings and was among those who received emails sent to the AVCGroup at the time these emails were exchanged. Garrett Glanz was Microsoft's representatives, and also received emails sent to the AVCGroup.
13. The email string from March 2004 (Ex. 3) includes my response to comments by Sony's representative, in which I described the purpose of the proposed addition to Section 8.3:
We will address your other comments in due course, but I want to comment here on Section 8.3. The proposed change makes this like the grantback in other licenses. It is in the interest of fairness both to other Licensees as well as Licensors because it assures that an affiliate of a Licensee that owns an essential patent cannot decline to license the essential patent on fair and reasonable terms.14. As reflected in the emails, although Sony expressed concern that the proposed change might dissuade some potential licensees from taking a license, Sony indicated that it was "fine with the revised language of 8.3" if others found it acceptable. Ex. 3.
15. In April 2004, Sony again expressed its concerns, preferring to kep the language in the original MPEG-4 License or, at a minimum, to re-define "Affiliates":
Our preference would be to drop Affiliates completely from the AVC license, in accordance with the scope of the MPEG4 Video license. If there is consensus against this, however, we must change the definition of Affiliates to be "more than 50%." (Ex. 4)16. In response, I recommended that the term "Affiliates" should be defined to apply only where a Licensee's control was "more than 50%" (rather than "50% or more"). I also stated that the grant-back provision would apply to those Affiliates meeting the "more than 50%" ownership requirement:
[T]he grant back obligations of a Licensee would apply in the normal course only to a "more than 50%" Affiliate (not a "50% or more" Affiliate and not to a less than 50% Affiliate). (Ex. 4)17. As reflected in the final version of the standard AVC/H.264 License adopted in approximately July 2004, the AVCGroup ultimately reached consensus and approved inclusion of the phrase "and its Affiliates, if any," in Section 8.3. As with all other AVC/H.264 Licenses, this language is included in Section 8.3 of the Google License. Ex. 1. The Google License also includes, in Section 1.1, the standard "more than 50%" language that had been under discussion. Ex. 1.
18. In the course of discussions regarding the purpose of Section 8.3 and related definitions, it was agreed that all Affiliates of a Licensee (rather than, for example, only the Affiliates of an Enterprise Licensee that are expressly identified by the Enterprise Licensee) needed to be included in the grant back obligation under Section 8.3. Based on my involvement in developing the terms of the standard AVC/H.264 License, the purpose of including the phrase "and its Affiliates, if any" in Section 8.3 was to eliminate any distinction between the H.264 standard essential patents of a Licensee and those of its Affiliates -- both are subject to the same grant-back terms. This prevents a Licensee from avoiding its grant-back obligations by holding patents indirectly, for example, via a subsidiary that it controls. Where a Licensee owns only 50% of a related company (but not more), the requisite control may be lacking. My understanding from various exchanges regarding the "more than 50%" language was that some companies were concerned that they would be unable to comply with the grant-back provision if they owned only 50% of the related company -- for example, where a licensee was engaged in a 50/50 joint venture. This is one reason why "more than 50%" ownership is required in the definition of Affiliate.
19. The first AVC/H.264 Licensees were issued in July 2004. At approximately the same time, I initiated separate negotiations among the group of MPEG-4 Licensors (many of whom were also Licensees) that led to inclusion of similar "Affiliates" language in an updated version of the MPEG-4 license. Attached as Exhibit 5 is a true and correct copy of an email string from July 2004 reflecting these discussions that I understand was produced by Microsoft in the above-captioned matter.
20. As referenced in emails included in Exhibit 5, at least two MPEG-4 Licensors, Toshiba and Fujitsu (both also Licensees), expressed concerns about the proposed change to the grant-back provision in the original MPEG-4 License. I explained the purpose of adding the proposed "Affiliates" clause as follows:
"Licensee or its Affiliates" is standard in the grant-back clauses of MPEG LA's MPEG-2, 1394, DVB-T and AVC Patent Portfolio Licenses (in the AVC License, Licensees also do not have the right to extend sublicenses to Affiliates). The purpose of this language is to prevent a Licensee from avoiding its grant back obligations through its affiliates (who then have the opportunity to hold licenses and licensors hostage to their essential patent claims for failure of the grant-back clause to apply to them) while the Licensee takes advantage of a license under all of the Licensors' essential patents. We believe this is a matter of fairness, and it has caused no problem in other licenses. Therefore, the suggestion was made to revisit this issue here, and we recommend including this language because it is in the interest of all Licensors and Licensees to do so.Ex. 5. This explanation accurately describes the purpose of the similar "and its Affiliates, if any" clause in Section 8.3 of the AVC/H.264 License.
21. In further response to an email from Fujitsu, I proposed that the definition of "Affiliates" in Section 1.1 of the original MPEG-4 License be revised to clarify that it would apply only where a Licensee owns "more than 50%" of another entity. Ex. 5.
22. The proposed changes to Section 8.3 and Section 1.1 were adopted by the MPEG-4 Licensors, resulting in provisions that are virtually identical to their counterparts in the AVC/H.264 License. Attached hereto as Exhibit 6 is a true and correct copy of the updated version of the MPEG-4 License (without attachments) with these changes executed by General Instrument in August 2005, which I understand was produced by Defendants in the above-captioned matter. It replaces the original version of the MPEG-4 License that General Instrument executed in September 2002 (see Ex. 2), whose grant-back provision did not cover "Affiliates," as explained above.
23. From the beginning of my tenure at MPEG LA, I have been involved in marketing the patent pools that MPEG LA administers and have periodically engaged in discussions with potential licensees regarding the scope and meaning of various standard license terms. Whenever a potential licensee has asked about operation of the "Affiliates" clause in the grant-back provisions discussed above, I have explained that the grant-back obligation applies to the SEPs of both the Licensee and all of its Affiliates, without exception. As a matter of policy, and to ensure delivery of consistent information on this topic, other MPEG LA personnel also provide the same response when fielding similar inquiries.
24. I understand that Motorola Mobility LLC and General Instrument Corporation are wholly-owned subsidiaries of Google. As wholly-owned subsidiaries, both companies would be treated as Google's Affiliates under the terms of the Google License. I am also aware that Microsoft is a Licensor and a Licensee to MPEG LA's AVC/H.264 patent pool. Accordingly, I understand that the grant-back provision of the Google License provides Microsoft with the right to license any AVC/H.264 SEPs held by Google, Motorola Mobility LLC, or General Instrument Corporation, all as provided in Section 8.3. This application of Section 8.3 is consistent with the purpose of the "and its Affiliates" language, as reflected in the discussions among the Licensor participants during the formation of the AVC/H.264 pool, described above.
I declare under penalty of perjury under the laws of the United States of America, that the foregoing was true and correct.
DATED this 21st day of January, 2013, in Chevy Chase, MarylandLAWRENCE A. HORN
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